Supply and demand. Imagine that!

From a recent post:

Graph #1: Treasuries Held by the Fed (black) and the Fed Funds Rate (inverted)

The graph compares the rate of change in US Treasury Securities held by the Fed to the effective Fed Funds rate... with the Fed Funds rate inverted on the graph. The two series seem to show a lot of similarity -- enough to draw me back for another look.

Graph #1 starts in January 2009, not long after the Federal Reserve announced its intent to start paying interest on reserves. Essentially, the graph shows the time that the Fed has been paying interest on reserves.

Makes me wonder how these series compare in the time before interest on reserves.

Graph #2: The Black Line from Graph #1, and the Historical Record

The two peaks that begin during the Great Recession, visible in black on Graph #1, are also clearly visible on Graph #2.

Number 2 shows in blue the same series we see in black on Graph #1 -- but the full extent of it, back to 2002. In red, the graph shows a similar series that goes back to 1970 and which, as it happens, we looked at before.

I will use the red line, Federal Debt Held by Federal Reserve Banks, in a new graph that extends the Graph #1 comparison back in time to 1970 or before.

I show the red line as a Percent Change from Year Ago number. And I extend it to the years before 1970 by using the older, discontinued version of the same "debt held" data, also shown in red.

Graph #3: Debt Held by the Fed (red) and the Fed Funds Rate

This graph extends Graph #1 back to the 1950s.

On Graph #1 the two lines follow a similar path. On Graph #3 for the same period (since 2009) they do not. That is because the numbers shown here in red are massively larger than those shown in blue. That size difference is masked on Graph #1 by putting the interest rate on the right-hand scale.

It is important to observe the similarity of pattern that Graph #1 shows. It is also important to realize that we are comparing very large and very small numbers. Now I will take Graph #3 and cut off the years we saw on Graph #1, at the end where the red line goes wacky. That way we can begin to look at the years ignored on Graph #1, numbers that are comparable in size.

Graph #4: Debt Held and Fed Funds BEFORE the Crisis

Now I need to flip the Fed Funds rate upside down like it is on Graph #1. I'm doing this because on Graph #1 the flipping let us more easily see the similarity of pattern. (For the record, I don't see anything in Graph #4 but a jumble.)

Graph #5: Same as #4, with the Interest Rate Inverted

Can you see any similarity there? Maybe. The low point of the blue line (really, the high point of interest rates in the early 1980s) might correspond to three lows in succession in the red line. The three lows I'm looking at, the middle one lines up with the low point of the blue, between the 1980 and '82 recessions.

Again on the blue line, working both ways from the low point, there are some humps in the blue line that may match up to humps in the red line. Two humps before the 1980 recession, punctuated by the 1970 and '74 recessions. And two or three humps after the 1982 recession, with echoes in the red line. But this is all rather vague, and seems to depend on me pointing out humps and emphasizing them. So I wouldn't say there is any strong relation visible on Graph #5.

Still looking, let me tweak the blue line to show "percent change from a year ago", as the red line shows. I have high hopes...

Graph #6: Same as #5, except Percent Change for the Blue Line

Ha! Well, what can we do with this? Maybe move the red line to the right-hand scale?

Nah, I won't waste your time with that one. I'm gonna crop off early years of the blue line, to get rid of those high points and zoom in on where the red and blue are closer together.

Graph #7: Zooming In on Graph #6

For Graph #7 I cut off all the years before 1970. Also, I had to leave the red line on the right scale to make it big enough to see anything.

Okay, maybe this is our first result. I had to enlarge the red line in order to see it. The red line here is the "debt held" line, Federal Debt Held by Federal Reserve Banks.

On Graph #1 I had to enlarge the Fed Funds line to see anything. On Graph #7 I enlarged not the Fed Funds, but the other line. It is as if, on Graph #1 (since 2009) the interest rate is the smaller number. (You know, down near the zero bound.) But on #7 (before the crisis) the "debt held" number was the smaller number, changes in debt held.

That's true, too. The changes in Debt Held only got big since the crisis, as Graph #2 shows.

Okay, this is a good result. It tells us that interest rates are low since the crisis, and Debt Held is high. This isn't news. These are things we already know. But at least our graph agrees with what we know.

//

On Graph #7 low points in the blue that occur at the same time as the high points (or high periods) in the red line. I want the take the interest rate, the blue line, and take the minus sign out of it. I want to un-invert the line.

No.

I switched the blue line back to Percent (rather than Percent Change of Percent). The next graph compares Debt Held (red) to the Fed Funds interest rate, since 1970. The interest rate is still inverted:

Graph #8: Debt Held (red) and the Inverted Fed Funds Rate

There seems to be some correspondence here. Red and blue both bottom out between the 1980 and '82 recessions. And it seems in general that high goes with high, and low goes with low. This is the same result we got from Graph #1: With the interest rate inverted, we see pattern similarity.

After the mid-1990s the red and blue seem to pull away from each other. Interest rates were falling (but on this graph, rising, because they are inverted) and Debt Held, while still spiking up, seems to be drifting down.

Oddly, though the lines drift apart, those late spikes in the red line seem to match up with high spots in the blue line.

And finally, let me take the minus sign off the interest rate:

Graph #9: Debt Held, and the Fed Funds Rate

Red lows match blue highs in 1981 and 1984 and 1989 and 1996 and 2000. Red highs match blue lows in 1971 and 1976 and 1987 and 1994 and 1997 and 1999 and 2003.

The opposites thing isn't perfect. Red highs match blue highs in the 1980 recession and just before the '74 recession. And the two lines look nothing like each other -- they show nothing like the symmetry visible in the years since 2009, as we saw in Graph #1.


In summary, it seems safe to say this: Given the demand for base money, there appears to be an inverse relation between supply and price. When the supply goes up, the interest rate tends to go down; and when the supply goes down, the interest rate tends to go up.

Imagine that!